Main themes

The meetings I had in Washington in mid-May touched on four main themes: economic policy, trade policy, US politics, and energy and innovation.

“Republicans evoked a second wave of tax reform, to be unveiled before the November mid-term elections.”

Christophe Donay Head of Asset Allocation & Macroeconomic Research

I) Economic policy

The top economic policy officials I met in the Trump administration are overwhelmingly strong advocates of supply-side economics. A second wave of tax reform (following the first wave, announced last December) was evoked by many officials, to be unveiled before the mid-term elections. This new wave may well aim to transform the temporary household tax cuts of last December into permanent ones, reduce the number of tax brackets, and cut the marginal rate of income tax. Further tax help for small businesses may also be in the offing. Republicans believe that a new tax bill in the autumn will be much easier to pass into law than the previous one.

Republicans consider that since the full effect of the first wave of tax cuts have yet to be felt, there is little probability of a recession in the US anytime soon. Republicans still hold the same basic view: tax cuts lead to a bigger public deficit today but higher growth tomorrow, which in turn means higher tax receipts, thus lowering the public deficit further down the road.

II) Trade policy

Two principle concerns were mentioned on the trade front. The first was how to protect US intellectual property against China, the second was China’s “belt and road initiative” in Asia. The Americans do not want to let China set the rules on trade in Asia. But Republicans are generally sanguine about escalating trade tensions.

Despite a lot of ‘noise’, they believe trade wars can be avoided. It is worth remembering that alongside a fair share of protectionists, the Trump administration also contains a number of free-trade advocates. In the end, it is felt in Republican circles that President Trump will manage to obtain trade concessions from China. Some advisors believe China’s huge holdings of US debt (about USD1.3trn) presented a huge conundrum for it as there is realistically no potential buyer for this amount of US debt, should the need arise. China is therefore much more inclined to work with the US rather than against it, simply because it is in its own best interest.

III) US politics, deregulation

Republicans believe that they can keep control of the Senate after the mid-term elections in November, but seem less confident about the House of Representatives. The prospect of policy gridlock was evoked. While a Democrat-dominated House might try to reverse Republican achievements, especially on tax cuts, it is felt some kind of cooperation with Republicans on tax is possible.

Republicans point with pride to their efforts at deregulation and moves to reduce government bureaucracy. While perhaps at a slower pace, the Republicans met in mid-May expected to continue on this road, with the possibility of further efforts in the banking sector, which is in the hands of 12 different regulatory bodies.

Vice-president Mike Pence enjoys very strong credibility on Capitol Hill. Pence was previously governor and House of Representatives member for Indiana, a state that has moved from 29th to 2nd position among US states in terms of growth.

IV) Energy, innovation

The return of the US as the world’s number 1 oil and gas producer is a source of considerable satisfaction on Capitol Hill and seen as a means of furthering the US’s geopolitical ends. Policy makers are also intent on exploiting technology disruption to further US interests in areas such as healthcare.

Nuclear power has been neglected in the US (for reasons that go back to the Three Mile Island accident in 1979). But there seems to be interest in political circles to revive the US’s civilian nuclear programme.

* With apologies to Frank Capra